Legislative Audit Division State of Montana Report to the Legislature Financial-Compliance Audit January 2004 For the Two Fiscal Years Ended June 30, 2003 Board of Regents and Office of the Commissioner of Higher Education This report contains three recommendations regarding compliance with state law. Major issues addressed in the report include: 4 Transfers made out of the General Fund without proper appropriation. 4 Accumulation of unreverted General Fund appropriation. Direct comments/inquiries to: Legislative Audit Division Room 160, State Capitol PO Box 201705 03-19 Helena MT 59620-1705 Help eliminate fraud, waste, and abuse in state government. Call the Fraud Hotline at 1-800-222-4446 statewide or 444-4446 in Helena. FINANCIAL-COMPLIANCE AUDITS Financial-compliance audits are conducted by the Legislative Audit Division to determine if an agency’s financial operations are properly conducted, the financial reports are presented fairly, and the agency has complied with applicable laws and regulations. In performing the audit work, the audit staff uses standards set forth by the American Institute of Certified Public Accountants and the United States General Accounting Office. Financial-compliance audit staff members hold degrees with an emphasis in accounting. Most staff members hold Certified Public Accountant (CPA) certificates. Government Auditing Standards, the Single Audit Act Amendments of 1996 and OMB Circular A-133 require the auditor to issue certain financial, internal control, and compliance reports. This individual agency audit report is not intended to comply with these reporting requirements and is therefore not intended for distribution to federal grantor agencies. The Legislative Audit Division issues a statewide biennial Single Audit Report which complies with the above reporting requirements. The Single Audit Report for the two fiscal years ended June 30, 2003, will be issued by March 31, 2004. The Single Audit Report for the two fiscal years ended June 30, 2001, was issued on March 26, 2002. Copies of the Single Audit Report can be obtained by contacting: Single Audit Coordinator Legislative Audit Division Office of Budget and Program Planning Room 160, State Capitol State Capitol PO Box 201705 Helena MT 59620 Helena MT 59620-1705 Phone (406) 444-3616 MEMBERS OF THE LEGISLATIVE AUDIT COMMITTEE Senator John Cobb Representative Dee Brown Senator Mike Cooney Representative Tim Callahan Senator Jim Elliott, Vice Chair Representative Hal Jacobson Senator John Esp Representative John Musgrove Senator Dan Harrington Representative Jeff Pattison, Chair Senator Corey Stapleton Representative Rick Ripley LEGISLATIVE AUDIT DIVISION Scott A. Seacat, Legislative Auditor Deputy Legislative Auditors: John W. Northey, Legal Counsel Jim Pellegrini, Performance Audit Tori Hunthausen, IS Audit & Operations James Gillett, Financial-Compliance Audit January 2004 The Legislative Audit Committee of the Montana State Legislature: This is our financial-compliance audit report on the Board of Regents and Office of the Commissioner of Higher Education (OCHE) for the two fiscal years ended June 30, 2003. This report contains three recommendations where OCHE should comply with state law. The written response to the audit recom- mendations is included at the end of the audit report. We thank the commissioner and her staff for their assistance and cooperation throughout the audit. Respectfully submitted, Signature on file Scott A. Seacat Legislative Auditor Room 160, State Capitol Building PO Box 201705 Helena, MT 59620-1705 Phone (406) 444-3122 FAX (406) 444-9784 E-Mail [email protected] Legislative Audit Division Financial-Compliance Audit For the Two Fiscal Years Ended June 30, 2003 Board of Regents and Office of the Commissioner of Higher Education Members of the audit staff involved in this audit were Chris Darragh and Joyce Weber. Table of Contents Appointed and Administrative Officials..............................................ii Report Summary............................................................................S-1 Introduction.....................................................................................................................................1 Introduction......................................................................................1 Background.......................................................................................2 Board of Regents of Higher Education...........................................2 Office of the Commissioner of Higher Education............................2 Prior Audit Recommendations............................................................4 Findings and Recommendations......................................................................................................5 General Fund Appropriation Transfers................................................5 Board Policy Contrary to State Law...............................................6 Adopt Rules.................................................................................7 Independent Auditor’s Report & Office Financial Schedules.......................................................A-1 Independent Auditor’s Report..........................................................A-3 Schedule of Changes in Fund Balances & Property Held in Trust for the Fiscal Year Ended June 30, 2003......................A-5 Schedule of Changes in Fund Balances & Property Held in Trust for the Fiscal Year Ended June 30, 2002......................A-6 Schedule of Total Revenues & Transfers-In For the Fiscal Year Ended June 30, 2003..........................................A-7 Schedule of Total Revenues & Transfers-In For the Fiscal Year Ended June 30, 2002..........................................A-8 Schedule of Total Expenditures & Transfers-Out For the Fiscal Year Ended June 30, 2003..........................................A-9 Schedule of Total Expenditures & Transfers-Out For the Fiscal Year Ended June 30, 2002........................................A-10 Notes to the Financial Schedules....................................................A-11 Board/Office Response..................................................................................................................B-1 Montana University System, Office of the Commissioner of Higher Education..........................B-3 Page i Appointed and Administrative Officials Term Expires Board of Regents of Ed Jasmin, Chair Bigfork Feb. 1, 2004 Higher Education Christian Hur, Student Regent, Vice Chair Billings June 30, 2004 John Mercer Polson Feb. 1, 2008 Lynn Morrison-Hamilton Havre Feb. 1, 2006 Richard Roehm Bozeman Feb. 1, 2005 Mark Semmens Great Falls Feb. 1, 2007 Lila Taylor Busby Feb. 1, 2010 Judy Martz, Governor* Linda McCulloch, Superintendent of Public Instruction* *Ex officio member Commissioner of Higher Sheila M. Stearns, Ed. D Commissioner of Higher Education Education Beginning September 1, 2003 Rodger Barber Acting Deputy Commissioner for Academic and Student Affairs (September 2003) Rod Sundsted Associate Commissioner for Fiscal Affairs Laurie O. Neils Director of Budget and Accounting Page ii Report Summary Board of Regents and We performed a financial-compliance audit of the Board of Regents Office of the and Office of the Commissioner of Higher Education (OCHE) for Commissioner of Higher the two fiscal years ended June 30, 2003. The prior audit report Education contained three recommendations. OCHE implemented all three recommendations. The three recommendations in this report relate to complying with state laws. We issued an unqualified opinion on the financial schedules contained in the report. This means the reader may rely on the information presented in the financial schedules and the supporting information on the state’s accounting system. The listing below serves as a means of summarizing the recommendations contained in the report, OCHE’s response thereto, and a reference to the supporting comments. Recommendation #1 We recommend that OCHE comply with state law and not pay state funds where it has no obligation for such payments...........6 Board/Office Response: Concur. See page B-4 Recommendation #2 We recommend OCHE and the Board of Regents modify the Board of Regents policy for OCHE regarding Retirement Costs Revolving Accounts to comply with state law........................7 Board/Office Response: Concur. See page B-4 Recommendation #3 We recommend the board comply with state law by adopting rules to implement compliance with the Military Selective Service Act..................................................................................8 Board/Office Response: Concur. See page B-4 Page S-1 Introduction Introduction We performed a financial-compliance audit of the Board of Regents and Office of the Commissioner of Higher Education (OCHE) for the two fiscal years ended June 30, 2003. The objectives of our audit were to: 1. Determine OCHE and the Board’s compliance with applicable state and federal laws and regulations. 2. Make recommendations for improvements in OCHE and the Board’s management and internal controls. 3. Determine the implementation status of prior audit recommendations. 4. Determine if OCHE and the Board’s financial schedules are fairly presented for the two fiscal years ended June 30, 2003. The Montana Guaranteed Student Loan Program, which is part of OCHE, allows eligible students to receive guaranteed loans from lending institutions for post-secondary education. The program is audited annually by our office (#02-06 and #03-06). In accordance with section 5-13-307, MCA, we analyzed and disclosed the cost, if significant, of implementing the recommendations made in this report. Areas of concern deemed not to have significant effect on the successful operations of OCHE are not specifically included in the report, but have been discussed with management. As required by section 17-8-101(6), MCA, we audited and are reporting on the reasonableness of internal service fund fees and fund equity balances at OCHE. OCHE has one internal service fund, the Montana University System (MUS) group insurance program. We reviewed the internal service fund activity and determined the rates are commensurate with costs and the fund equity balance is reasonable. Page 1 Introduction Background Board of Regents of Higher Article X of the Montana Constitution establishes the Board of Education Regents of Higher Education to govern and control the Montana University System. The board has administrative and supervisory control of the units of the university system and general supervision of community colleges. The board consists of seven members appointed by the Governor and confirmed by the Senate. The Governor and the Superintendent of Public Instruction are ex officio members of the board. Office of the Commissioner As required by Article X of the Montana Constitution, the board of Higher Education appoints a Commissioner of Higher Education. The board prescribes the term and duties of the commissioner. The commissioner is responsible for providing leadership, technical assistance, and staff support to the board and the units of the university system. Duties of the Office of the Commissioner of Higher Education include academic planning and curriculum review, budgetary planning and control, legal services and labor negotiation policies and procedures. Total authorized full-time equivalent (FTE) staff for OCHE was 96.57 FTE during the audit period. These FTE include 18.4 FTE funded by the General Fund for general administration and operations, and 74.17 FTE for federal grant operations, of which 49.2 FTE are for the Guaranteed Student Loan program. The office was accounted for in 11 programs in fiscal year 2002-03 as shown on the financial schedule on page A-9. Fiscal year 2001-02 had one additional program, the Tribal College Assistance Program, as shown on the financial schedule on page A-10. The funds available for this program were fully distributed to the tribal colleges. A brief discussion of the current programs follows: Administration Program - provides general administration for all the duties of the office. This includes academic, student assistance, financial, and legal administration as well as labor relations and personnel administration. Page 2 Introduction Board of Regents Administration - consists of the costs associated with the operation of the board. Student Assistance Program - consists of the Western Interstate Commission on Higher Education (WICHE) student exchange program; the Washington, Wyoming, Alaska, Montana, Idaho (WWAMI) cooperative medical program; the Leveraging Educational Assistance Partnership (LEAP) program; the Perkins Loan Fund match program; state matching dollars for the federal Supplemental Education Opportunity Grant (SEOG); the Montana Work Study Program; the Montana Tuition Assistance Program (MTAP); and the Baker Grants. Guaranteed Student Loan Program - processes loan applications, maintains records on student borrowers, warehouses records, collects loan payments and performs other duties related to the Federal Family Education Loan program. MUS Group Insurance Program - accounts for all activity related to the Montana University System employee benefits program and flexible spending plan. Work Force Development Program - the Board of Regents is designated as the sole state agency for the federal Vocational Education - Basic Grants to States, formerly known as the Carl D. Perkins program. This program supports vocational education at the secondary and post secondary level. Dwight D. Eisenhower Mathematics & Science Education Act - is a federal program that provides funds to upgrade the teaching skills of teachers in the mathematics and science disciplines. Grants are awarded to institutions of Higher Education within the state on a competitive basis. Talent Search - is a federally funded program to provide career and financial aid counseling to selected students. It includes General Fund support for an American Indian/Minority Achievement Page 3